Debt Aversion: Theory and Measurement

Abstract

ABSTRACT We propose a model of debt aversion and conduct an experiment with real debt and saving contracts to jointly elicit debt aversion and preferences over time, risk, and intertemporal losses. We find that 89% of participants are debt averse, which strongly influences their choices. The estimated “borrowing premium,” the compensation an average person requires to accept debt, is around 16% of the principal. Applying a validated survey module to a representative sample of German households, we find that debt aversion is both statistically and economically significantly associated with actual debt‐taking and financial health.